BSE to merchant bankers: Ensure due diligence on SME IPOs

BSE has warned merchant bankers that sometimes discrepancies have come to light, and that due diligence based on SEBI guidelines needs to be followed. In a potential sign that stock exchanges are tightening regulations on SME issuers, the BSE has cautioned that merchant bankers should conduct thorough due diligence before submitting draft papers, according to multiple sources. On Tuesday, BSE held a meeting with over 80 merchant bankers “to discuss the best practices that could further strengthen and smoothen the SME IPO listing process”.This comes after the exchange earlier held off the listing of Trafiksol ITS Technologies last week, saying the issuer needed to resolve certain issues that were raised. While the Securities and Exchange Board of India (SEBI) and other market participants have warned of malpractices in some of the SME IPOs, the move surprised many investors, whose money is still stuck in the IPO as uncertainty over listing looms. BSE has warned merchant bankers that sometimes discrepancies have come to light, and that due diligence based on SEBI guidelines needs to be followed. “The tone was very cognitive. The message was loud and clear,” said one of the merchant bankers who was part of the meeting. Experts said the recent developments could lead to exchanges taking longer time to approve SME IPOs. Unlike with mainboard IPOs, the draft papers for SME IPOs are not approved by the SEBI. It is done by the NSE and BSE, who are the regulators-com-exchanges for the SME platforms. As per the BSE SME data, the market capitalization of companies listed on SME platforms to date is Rs.1.89 trillion. “I believe the merchant bankers would understand quickly that if they want to fasten the approval process, they must follow due diligence. Ultimately, it is a business for us,” the merchant banker said. SEBI has been warned of malpractices by some SME issuers and has also passed orders against a few of them in the past few months. Last month, the regulator warned that some of the SME companies and their promoters have been “resorting to certain means that project an unrealistic picture of their operations”. SEBI had said such companies create positive sentiment around their company through certain announcements, and that this presents for promoters an opportunity to offload their stake at elevated prices.